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UNITED STATES

Washington, D.C. 20549

Form 10-Q

Commission file number 1-9550

Beverly Enterprises, Inc.

(Exact name of Registrant as specified in its charter)

One Thousand Beverly Way

Registrant’s telephone number, including area code: (479) 201-2000

      Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

Shares of Registrant’s Common Stock, $.10 par value, outstanding, exclusive of treasury shares,

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BEVERLY ENTERPRISES, INC.

FORM 10-Q

MARCH 31, 2003

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PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Note: The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.     General

      References throughout this document to the Company include Beverly Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to Beverly Enterprises, Inc. and its wholly owned subsidiaries and not to any other person.

      We have prepared these condensed consolidated financial statements, without audit. In management’s opinion, these financial statements include all normal recurring adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2003 and 2002 in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures required by accounting principles generally accepted in the United States have been condensed or omitted, we believe that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission. Our results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results for a full year.

      Results of operations for the first quarter of 2002 have been restated for the cumulative effect of a change in accounting for goodwill of $77.2 million, net of income taxes, or $0.74 per share, resulting from the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

      Certain prior year amounts have been reclassified to conform with the 2003 presentation.

      The Company’s website — www.beverlycares.com — provides access to the Company’s Securities and Exchange Commission reports within 24 hours of filing.

      Accounting principles generally accepted in the United States require management to make estimates and assumptions when preparing financial statements that affect:

	•	the reported amounts of assets and liabilities at the date of the financial statements; and
	•	the reported amounts of revenues and expenses during the reporting period.

      They also require management to make estimates and assumptions regarding contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

      The Company has an agreement to sell, on an ongoing basis, certain of its patient accounts receivable through a revolving sales structure and retains servicing responsibilities for the transferred receivables. The Company accounts for the transfers of receivables as sales in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). Accordingly, the related patient accounts receivable are not included in the consolidated balance sheets.

      During 2003 and 2002, the Company, through its wholly owned subsidiary Beverly Health and Rehabilitation Services, Inc. (“BHRS”), sold on a revolving basis certain Medicaid and Veterans Administra-

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

tion patient accounts receivable to a non-consolidated bankruptcy remote, qualifying special purpose entity, Beverly Funding Corporation (“BFC”) at a discount of 1%. These daily transactions constitute true sales of receivables for which BFC bears the risk of collection.

      Activities related to the revolving sales structure with BFC were as follows for the three months ended March 31 (in thousands):

      BHRS provides invoicing and collection services related to the receivables for a market-based servicing fee. BHRS recognizes a loss for the 1% discount at the time of sale which is included in “Other operating and administrative costs and expenses” and in “Net cash provided by operating activities” in our condensed consolidated financial statements. The loss on sale and the servicing fee revenue are not considered material to the Company’s operating results or cash flows.

      Approximately 80% of our net operating revenues for the three months ended March 31, 2003 and 2002, is derived from federal and state medical assistance programs (primarily Medicare and Medicaid). We record revenues when services are provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements based on contractual terms and historical experience. These revenues are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment.

      Retroactive adjustments are estimated in the recording of revenues in the period the related services are rendered. These amounts are adjusted in future periods as adjustments become known or as cost reporting years are no longer subject to audits, reviews or investigations. Due to the complexity of the laws and regulations governing the Medicare and Medicaid programs, there is at least a possibility that recorded estimates will change by a material amount in the near term.

      Compliance with laws and regulations governing the Medicare and Medicaid programs is subject to government review and interpretation, as well as significant regulatory action including fines, penalties, and possible exclusion from the Medicare and Medicaid programs. In addition, under the Medicare program, if the federal government makes a formal demand for reimbursement, even related to contested items, payment must be made for those items before the provider is given an opportunity to appeal and resolve the issue.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      Comprehensive income (loss) includes charges and credits to stockholders’ equity not included in net income (loss). The components of comprehensive income (loss), net of income taxes, consist of the following for the three months ended March 31 (in thousands):

      Accumulated other comprehensive income (loss), net of income taxes, primarily consists of net unrealized losses on available-for-sale securities of approximately $192,000 at March 31, 2003 and unrealized gains of approximately $512,000 at December 31, 2002.

      During the three months ended March 31, 2003, we recorded net pre-tax charges totaling approximately $1.2 million for workforce reductions primarily related to 27 associates who were notified in the first quarter of 2003 that their positions were eliminated. The $1.2 million net pre-tax charges included the following:

	•	$1.5 million of cash expenses, approximately $745,000 of which was paid during the three months ended March 31, 2003; and
	•	non-cash expenses of approximately $125,000 related to the vesting of restricted stock, net of approximately $391,000 due to the cancellation of restricted stock.

      The following table summarizes activity in our estimated workforce reductions and exit costs for the three months ended March 31 (in thousands):

      During the fourth quarter of 2002, a formal plan was approved by our Board of Directors to pursue the sale of our Matrix segment and MK Medical business unit. The decision to sell these non-strategic assets was made primarily to allow us to further reduce our debt level and to reinvest in facilities, technology and other business opportunities consistent with our strategic objectives.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the remaining assets and liabilities of Matrix and the assets of MK Medical have been classified in the “held for sale” asset and liability line items in the accompanying consolidated balance sheets. The related asset carrying values have been adjusted, if appropriate, to reflect the estimated fair values less costs to sell. In addition, we have included certain non-operational nursing facilities, which we expect to dispose of in 2003, in assets held for sale in the accompanying consolidated balance sheets.

      A summary of the asset and liability line items from which the reclassifications have been made at March 31, 2003 is as follows (in thousands):

      During January 2003, we sold the outpatient rehabilitation clinic operations and the managed care network of Matrix for gross cash proceeds of $36.0 million. During February 2003, we sold one non-operational nursing facility for $5.5 million, including cash and a $4.1 million note receivable. Also during the first quarter of 2003, we sold, closed or terminated the leases on five nursing facilities (345 beds) and certain other assets for cash proceeds of approximately $617,000. We recognized net pre-tax gains of approximately $10.3 million as a result of our first quarter 2003 disposal activities. The operations of Matrix, the nursing facilities and other assets were immaterial to our consolidated financial position and results of operations. We expect to sell the remaining Matrix operations, MK Medical operations and the remaining non-operational nursing facilities during 2003.

      The results of operations of Matrix and MK Medical, as well as the five nursing facilities sold in the first quarter of 2003, have been reported as discontinued operations for both periods presented in the accompanying condensed consolidated statements of operations. Also included in discontinued operations for the first quarter of 2003 are the gains and losses on sales and exit costs relative to disposal transactions. A summary of the discontinued operations of Matrix, MK Medical and the five nursing facilities sold, closed or terminated for the three months ended March 31 is as follows (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The provisions for income taxes of $1.2 million and $1.1 million for the three months ended March 31, 2003 and 2002, respectively, primarily relate to current state income taxes estimated to be due in “separate return” filing states where we conduct business. The provisions differ from those calculated using the federal statutory rate due to changes in the valuation allowance, established at December 31, 2001, for net deferred tax assets. In 2003, the valuation allowance decreased primarily due to the reversal of temporary differences in conjunction with the Matrix disposition and associated with certain MK Medical related costs, which were partially offset by an increase in the net operating loss carryforwards. In 2002, the valuation allowance decreased primarily due to taxable income for the first quarter, which was partially offset by net operating loss carryforwards.

      In March 2003, we acquired three leased properties (358 beds) that were subject to our off-balance sheet lease arrangement for cash of approximately $16.8 million. These acquisitions were in accordance with the 2003 amendments to our credit facility and our off-balance sheet lease arrangement.

      Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”), issued on December 31, 2002, amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) to provide alternative methods of transitioning to the fair value method of accounting for stock-based compensation, and amends certain disclosure requirements. SFAS No. 148 does not mandate fair value accounting for stock-based compensation. We currently do not recognize compensation expense for our stock option grants, which are issued at fair market value on the date of grant, and are accounted for under the intrinsic value method. We are in full compliance with the current accounting rules surrounding stock-based compensation. However, the Board of Directors and management are carefully reviewing and considering the expensing of stock options in our consolidated statements of operations. Currently, we believe that adopting fair value accounting would be premature since the accounting standard setters, both in the United States and internationally, are reviewing and could revise the stock option accounting model by the end of 2003.

      For purposes of pro forma disclosures, the estimated fair market value of all stock options currently outstanding is amortized to expense over the respective vesting periods. The fair market value has been estimated at the date of grant using a Black-Scholes option pricing model. The following table summarizes our pro forma net income (loss) and basic and diluted net income (loss) per share assuming we accounted for our stock option grants using the fair value method in accordance with SFAS No. 123, for the three months ended March 31 (in thousands except per share amounts):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      In order to adopt the recognition provisions of SFAS No. 148 on a prospective basis, under the current rules we must make this election during the year ending December 31, 2003 and change to fair value accounting for stock options. The prospective method of recognizing the fair value of stock-based compensation requires compensation expense to be recorded only on stock options granted in the year the recognition provisions are adopted as well as grants in subsequent years. All options issued in years prior to adopting the fair value recognition provisions continue to be accounted for under the intrinsic value method. We have not issued any options to date in 2003 and do not anticipate a material amount of options being granted this year. Therefore, adopting the prospective method in 2003 would not have a material impact on our consolidated results of operations. We will continue to evaluate the transition provisions of SFAS No. 148 throughout 2003.

      In April 2003, we issued approximately 2.5 million shares of restricted stock to certain officers and other employees. These shares vest one-third per year over the three years following the grant date. These restricted stock grants were made, along with certain cash incentives, as part of a program designed to retain key associates. If these additional shares had been issued prior to January 1, 2003, the Company’s net income per share for the three months ended March 31, 2003 would have been reduced by $.01 to $.11 per share diluted. We recognize compensation for our restricted stock grants at the fair market value of our common stock on the date of grant, amortized over the respective vesting periods on a straight-line basis.

      We are party to various legal matters relating to patient care, including claims that our services have resulted in injury or death to residents of our facilities. We have experienced an increasing trend in the number and severity of the claims asserted against us. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on us.

      There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages that are generally not covered by insurance. We do not believe that the ultimate resolution of such matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. (See “Part II, Item 1. Legal Proceedings”).

      Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, provides disclosure guidelines for segments of a company based on a management approach to defining operating segments. Our operations are organized into three primary segments:

	•	Nursing Facilities, which provide long-term healthcare through the operation of skilled nursing facilities and assisted living centers;
	•	AEGIS, which provides rehabilitation therapy services under contract to Beverly and non-Beverly facilities; and
	•	Home Care, which provides home health, hospice and home medical equipment services. A portion of this segment, MK Medical, was held for sale as of March 31, 2003 and as such, its operations are included in discontinued operations in the accompanying condensed consolidated statements of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The following table summarizes certain information for each of our operating segments (in thousands):

(1)	Consists of the operations of our corporate headquarters and related overhead, as well as certain non-operating revenues and expenses. These amounts also include pre-tax charges totaling approximately $1.2 million in 2003 for workforce reductions.
(2)	In accordance with the provisions of SFAS No. 144, the results of operations of Matrix, MK Medical and certain nursing facilities have been reclassified, for all periods presented, as discontinued operations. The remaining assets and liabilities of Matrix are classified as held for sale and the assets of MK Medical and certain non-operational nursing facilities are classified as held for sale at March 31, 2003. Prior to the sale of the Matrix outpatient therapy clinics and managed care network in the first quarter of 2003, Matrix was one of our primary operating segments.

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INDEPENDENT ACCOUNTANT’S REVIEW REPORT

The Board of Directors

      We have reviewed the accompanying condensed consolidated balance sheet of Beverly Enterprises, Inc. as of March 31, 2003, and the related condensed consolidated statements of operations and cash flows for the three months ended March 31, 2003 and 2002 (“Form 10-Q”). These financial statements are the responsibility of the Company’s management.

      We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

      We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Beverly Enterprises, Inc. as of December 31, 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended, not presented in the Company’s Form 10-Q, and in our report dated February 19, 2003, except for Notes 8 and 9 as to which the date is February 28, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, included in the Company’s Form 10-Q, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Little Rock, Arkansas

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BEVERLY ENTERPRISES, INC.

March 31, 2003

General

      This Quarterly Report on Form 10-Q, and other information we provide from time to time, contains certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service, refinance and comply with our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three-year strategic plan, and similar statements including, without limitation, those containing words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” “plans,” and other similar expressions are forward-looking statements.

      Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements. Numerous factors will affect our actual results, some of which are beyond our control. These include, but are not limited to:

	•	national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;
	•	the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;
	•	changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;
	•	the effects of adopting new accounting standards;
	•	liabilities and other claims asserted against the Company, including patient care liabilities, as well as the resolution of lawsuits brought about by the announcement or settlement of federal government investigations and the announcement of increases in reserves for patient care liabilities (see “Part II, Item 1. Legal Proceedings”);
	•	our ability to predict future reserve levels for patient care liabilities;
	•	our ability to execute strategic divestitures in a timely manner at fair value;
	•	our ability to improve our fundamental business processes and reduce costs throughout the organization;
	•	our ability to attract and retain qualified personnel;
	•	the availability and terms of capital to fund acquisitions, capital improvements and ongoing operations;
	•	the competitive environment in which we operate;
	•	our ability to maintain and increase census levels; and
	•	demographic changes.

      Investors should also refer to “Item 1. Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 for a discussion of various governmental regulations and other operating factors

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MANAGEMENT’S DISCUSSION AND ANALYSIS

relating to the healthcare industry and the risks inherent in them. Given these risks and uncertainties, we can give no assurances that any forward-looking statements, which speak only as of the date of this report will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

      The following discussion relates to the condensed consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

      The Company and its facilities are subject to extensive regulation by federal, state and local agencies. Each facility must comply with regulations regarding staffing levels, patient care standards, occupational health and safety, patient confidentiality, billing and reimbursement and environmental and biological hazards, among others. Additionally, government agencies have steadily increased their enforcement activity in this industry over the past several years, particularly with respect to large for-profit, multi-facility providers like us. This regulatory environment may force us to expend considerable resources to ensure compliance and respond to inspections, investigations or other enforcement actions. We believe the government will continue aggressive enforcement in the future.

      In the ordinary course of business, we periodically receive notices of deficiencies for allegations of failure to comply with various regulatory requirements. We review all such notices and take timely and appropriate corrective action. In most cases, the facility and the government will agree upon steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the government may take a number of adverse actions against the facility or the Company, including imposition of fines, temporary suspension of admission of new patients, decertification from participation in Medicaid or Medicare programs and licensure revocation.

Critical Accounting Policy Update

      General and professional liability costs for the long-term care industry have become increasingly expensive and difficult to estimate. In addition, insurance coverage for patient care liability and certain other risks, for nursing facilities specifically and companies in general, has become increasingly difficult to obtain. When obtained, insurance carriers are often requiring companies to significantly increase their liability retention levels and pay substantially higher premiums for reduced terms of coverage.

      The majority of our auto liability and workers’ compensation risks are insured through loss-sensitive insurance policies with affiliated and unaffiliated insurance companies. For our general and professional liabilities, we are responsible for the first dollar of each claim, up to a self-insurance limit determined by the individual policies, subject to aggregate limits in certain prior policy years. The Company’s retained liabilities are estimated by our independent actuaries twice a year using the most recent trends of claims, settlements and other relevant data. On an undiscounted basis, these liabilities totaled approximately $244.4 million at March 31, 2003. On our financial statements, these liabilities are discounted at 10% to their present value using expected loss payment timing patterns. The discount rate is based upon our best estimate of the incremental borrowing rate that would be required to fund these liabilities with uncollateralized debt. A reduction in the discount rate by one-half of a percentage point would have resulted in an additional pre-tax charge for the first quarter of 2003 of $1.6 million. Based on information provided by our independent actuaries, we estimate our range of discounted exposure for these liabilities to be $192.7 million to $209.4 million. At March 31, 2003, our recorded reserves for these liabilities totaled $204.7 million. We believe adequate provision has been made in the financial statements for liabilities that may arise out of patient care and other services.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Stock-Based Awards

      See “Item 1. Note 6” for a summary of our pro forma net income (loss) and basic and diluted net income (loss) per share assuming we accounted for our stock option grants using the fair value method in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.

Operating Results

      We reported net income from continuing operations for the first quarter of 2003 of $2.2 million, compared to $26.4 million for the same period in 2002. Net income from continuing operations for the first quarter of 2003 included pre-tax charges for workforce reductions totaling approximately $1.2 million.

      We reported net operating revenues of $586.0 million during the first quarter of 2003, compared to $593.1 million for the same period in 2002. The decrease of approximately $7.1 million consists of the following:

	•	a decrease of $16.6 million due to dispositions during 2002;
	•	an increase of $4.9 million from growth in AEGIS’ non-Beverly therapy business;
	•	an increase of $3.5 million primarily due to the openings of two newly constructed facilities and two hospice centers; and
	•	an increase of $1.1 million in facilities which we operated during each of the quarters ended March 31, 2003 and 2002 (“same facility operations”).

      The increase in net operating revenues of $1.1 million from same facility operations for the quarter ended March 31, 2003, as compared to the same period in 2002, consists of the following:

	•	$11.7 million due to an increase in Medicaid and private payment rates;
	•	increases of $3.0 million due to a positive shift in our patient mix and $4.2 million of various other items;
	•	partially offset by $9.9 million due to a net decrease in Medicare payment rates associated with the October 1, 2002 elimination of certain Medicare add-on payments; and
	•	$7.9 million due to a decline in same facility census.

      Approximately 95% of our total net operating revenues for the quarters ended March 31, 2003 and 2002, were derived from services provided by our Nursing Facilities segment.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

      We reported operating and administrative expenses of $547.9 million during the first quarter of 2003 compared to $530.6 million for the same period in 2002. The increase of approximately $17.3 million consists of the following:

	•	an increase of $29.1 million in same facility operations;
	•	an increase of $2.3 million primarily due to the openings of two newly constructed facilities and two hospice centers; and
	•	a decrease of $14.1 million due to dispositions during 2002.

      The increase in operating and administrative expenses of $29.1 million from same facility operations for the quarter ended March 31, 2003, as compared to the same period in 2002, was due primarily to the following:

	•	$18.3 million increase in our provision for insurance; and
	•	$7.6 million increase in wages and related expenses primarily due to an increase in our weighted average wage rates and an increase in nursing hours per patient day.

      Our provision for insurance and related items increased for the first quarter of 2003 as compared to the same period in 2002 primarily as a result of an increase in the actuarial projection of losses for patient care liabilities and an increase in premium and other costs associated with our various insurance programs. We adjust our accruals for prior policy year patient care liabilities and our accrual of expected losses for the current year based primarily on actuarial studies conducted twice per year. Adjustments to premiums and other costs are recorded as incurred.

      Depreciation and amortization expense decreased to $17.8 million for the quarter ended March 31, 2003, as compared to $18.9 million for the same period in 2002 primarily due to asset impairments recorded in the fourth quarter of 2002.

      The results of operations of Matrix and MK Medical, as well as the five nursing facilities sold in the first quarter of 2003, have been reported as discontinued operations for both periods presented in the accompanying condensed consolidated statements of operations. Also included in discontinued operations for the first quarter of 2003 are the gains and losses on sales and exit costs relative to disposal transactions. A summary of the discontinued operations of Matrix, MK Medical and the five nursing facilities sold, closed or terminated for the three months ended March 31 is as follows (in thousands):